- Chinese electric vehicle maker NIO stock is down about 19.5% in 2021.
- Nio is a play on the growth of the Chinese EV market.
- Interested investors could regard NIO stock as a proxy for Chinese alternative energy shares as well as EV makers and invest for the long-run, especially if the price goes toward $37.5 in the short term.
Long-term investors in Chinese electric vehicle group Nio (NYSE: NIO ) do not have much to report in 2021. So far this year, NIO stock is down almost 19.5%. By comparison, Tesla (NASDAQ: TSLA ) has returned over 58% YTD.
NIO stock is currently at $39.35. It hit a record high of $66.99 on Jan. 11. And the 52-week range for the stock has been $30.71 – $66.99. The decline since January came to a halt on Oct. 6, when shares hit an intraday low of $33.17. Since then Nio stock has returned around 20%.
The recent run-up in NIO corresponds to the up move in other EV names as well as many Chinese technology stocks, which came under state scrutiny earlier in the year. Meanwhile, on Nov. 10, Rivian Automotive (NASDAQ: RIVN ), the EV group backed by Amazon (NASDAQ: AMZN ), started trading at an opening price of $106.75 (covered earlier this week). In a matter of days, RIVN shares, which are now shy of $148, have returned an eye-popping 38%.
Recent metrics highlight:
“A total of 2,65 million new EVs found new owners during the first half of 2021, an increase of +168 % compared to 2020.”
Similarly, sales in China have been extremely strong as “Chinese consumers bought 1.79 million electric vehicles over the first eight months of 2021, up 194% from the same period last year.”
Given the expected growth in the sector worldwide, Wall Street keeps a close eye on NIO shares.
What To Expect From Nio Stock
The 12-month price range currently stands between $27-$86.99. Put another way, despite the recent rally in Nio shares, Wall Street remains optimistic for further upside.
Meanwhile, the stock’s P/S and P/B ratios stand at 12.07x and 16.25x. By comparison, the metrics for TSLA stock are 22.29x and 39.14x. And if we look at the ratios for the legacy automaker General Motors (NYSE: GM ), we see 0.69x and 1.73x.
Readers who watch technical charts might be interested to know that NIO’s short-term technical picture is urging caution. Given the extent of the recent up move, there could be some profit-taking in the coming days. The $40 level should act as resistance.
Our expectation is for Nio to give up some of its recent gains and move toward $37.5, or even below. In such a case, there should be strong support between $35 and $37.5. Afterward, the shares would likely trade sideways while it establishes a new base, and possibly start a new leg up.
3 Possible Trades On Nio
1. Buy NIO Stock At Current Levels
Investors who are not concerned with daily moves in price and who believe in the long-term potential of the company could consider investing in Nio shares now.
NIO stock is currently at $39.35. Buy-and-hold investors should expect to keep this long position for several months, if not multiple quarters, while the stock makes an attempt toward $58, Wall Street's consensus estimate.
Readers who opt for this approach, but are concerned about large declines, might also consider placing a stop-loss at about 3%-5% below their entry point.
2. Buy An ETF With Nio As A Holding
Many readers are familiar with the fact that we regularly cover exchange-traded funds (ETFs) that might be suitable for buy-and-hold investors. Thus, readers who do not want to commit capital to Nio stock but would still like to have substantial exposure to the shares could consider researching a fund that has the company as a holding.
Examples of such ETFs include:
- Invesco Golden Dragon China ETF (NASDAQ: PGJ ): The fund is down 28.4% YTD, and NIO’s stock’s weighting is 8.19%;
- First Trust NASDAQ® Clean Edge® Green Energy Index Fund (NASDAQ: QCLN ): The fund is up 14.1% YTD, and NIO stock’s weighting is 6.77%;
- KraneShares Electric Vehicles and Future Mobility Index (NYSE: KARS ): The fund is up 24.1% YTD, and NIO stock’s weighting is 4.45%.
3. Cash-Secured Put Selling
Investors who are bullish or would consider buying Nio shares at a level less than the current price could consider selling a cash-secured put option in NIO stock—a strategy we regularly cover. As it involves options, this set-up will not be appropriate for all investors.
A put option contract on Nio stock is the option to sell 100 shares. Cash-secured means the investor has enough money in his or her brokerage account to purchase the security if the stock price falls and the option is assigned. This cash reserve must remain in the account until the option position is closed, expires or the option is assigned, which means ownership has been transferred.
Let's assume an investor wants to buy Nio stock, but does not want to pay the current price of $39.35 per share. Instead, the investor would prefer to buy the shares at a discount within the next several months.
One possibility would be to wait for Nio stock to fall, which it might or might not do. The other possibility is to sell one contract of a cash-secured NIO put option.
So the trader would typically write an at-the-money (ATM) or an out-of-the-money (OTM) put option and simultaneously set aside enough cash to buy 100 shares of the stock.
Let's assume the trader is putting on this trade until the option expiry date of Feb. 18, 2022. As the stock is $39.35 at time of writing, an OTM put option would have a strike of $35.
So the seller would have to buy 100 shares of NIO at the strike of $35 if the option buyer were to exercise the option to assign it to the seller.
The NIO Feb. 18, 2022, 35-strike put option is currently offered at a price (or premium) of $2.55.
An option buyer would have to pay $2.55 X 100, or $255, in premiums to the option seller. This premium amount belongs to the option seller no matter what happens in the future. The put option will stop trading on Friday, Feb. 18.
Assuming a trader would enter this cash-secured put option trade at $39.35 now, at expiration on Feb. 18, the maximum return for the seller would be $255, excluding trading commissions and costs.
The seller's maximum gain is this premium amount if NIO stock closes above the strike price of $35.00. Should that happen, the option expires worthless.
If the put option is in the money (meaning the market price of NIO stock is lower than the strike price of $35.00) any time before or at expiration on Feb. 18, this put option can be assigned. The seller would then be obligated to buy 100 shares of NIO stock at the put option's strike price of $35.00 (i.e., at a total of $3,500).
The break-even point for our example is the strike price ($35.00) less the option premium received ($2.55), i.e., $32.45. This is the price at which the seller would start to incur a loss.
Cash-secured put selling is a moderately more conservative strategy than buying shares of a company outright at the current market price. This can be a way to capitalize on the choppiness in NIO stock in the coming weeks.
Investors who end up owning the shares of the EV maker as a result of selling puts could further consider setting up covered calls to increase the potential returns on their shares. Thus, selling cash-secured puts could be regarded as the first step in stock ownership.
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